by Joseph Miller (Winter 2018)
Tax rate objections and how to manage them
It is the time of year that fire protection districts get notice of tax objections. Not to be confused with tax assessment appeals, a tax rate objection is an objection against the levy of a fire protection district. Because the two terms are often used interchangeably, let’s start out with the difference between tax rate objections and tax assessment appeals.
A tax assessment appeal is an objection against the assessment valuation of one’s real property. The tax assessment appeal is actually an administrative procedure under the umbrella of the county assessor and is heard before a body called the “board of review”. It is technically not a lawsuit against the fire protection district. A final determination on an assessment usually occurs within three months of its filing. Almost always, a tax assessment appeal will be heard prior to the issuance of the next year’s tax bill.
A tax rate objection is a lawsuit against the levy filed by a fire protection district. Specifically, a tax rate objection will attack a specific fund of the levy. At issue will be the validity of the district’s levy. If a district’s levy is found invalid as to a fund, the district must repay that portion of its tax revenues attributable to the objector’s property for the invalid fund levy. A tax rate objection lawsuit is heard before a judge and not an administrative agency. As a lawsuit, tax rate objections can take years before a final determination is made.
Types of tax rate objections
The most common type of tax rate objection is an objection alleging an excess accumulation of funds within a fund. An excess accumulation objection asserts that a levy is not authorized because the taxing district has accumulated more than the average annual expenditure over the prior three years. The general guideline established in determining if a fund has an excess accumulation is if the total funds available in a fund are over two to three times the amount expended in the last fiscal year, the taxing district’s levy at issue is invalid. For example, if a fire protection district has more than $3,000,000 in its ambulance fund at the end of the fiscal year but only spent $1,000,000 out of the fund, the levy can be found invalid.
Another type of tax rate objection is for a violation of the Property Tax Extension Limitation Law (“PTELL”). Essentially, no fire protection district or governmental entity may levy for a new fund without the submission of referendum to the public authorizing the new rate. For example, a fire protection district could not initiate a rescue fund levy without having first submitting a question to the voters requesting authorization for a rescue fund levy.
A tax rate objection can also be filed if a district violates the Truth in Taxation Law. (35 ILCS 200/18-55) Under this Law, districts notify the public and hold hearings on their intentions to adopt aggregate levies that exceed 105% of the amount of property taxes extended upon the levy of the preceding year. This is the famous black border ad that we see in newspapers around the time that most districts adopt their levy. Failure to comply may invalidate a district’s levy above a five percent increase.
The fourth most common tax rate objection we encounter is an objection where the levy lacks specificity or is levied without legal appropriation for that purpose. These objections can occur when financial documents show expenditures from a fund for which an expenditure cannot be made. An example of this type of objection would be use of the tort fund levy revenues to pay for non-risk management projects.
Tax objection defenses
Although somewhat complicated, there are defenses to many of the tax rate objections. Let’s start with the objections for an excess accumulation of funds. Under Illinois law, fire protection districts are allowed to accumulate funds in the corporate fund for the purposes of building, repairing and improving firehouses; for procuring firehouse sites; fire-fighting apparatus and equipment; and training for emergencies involving hazardous substances. (70 ILCS 705/14). These are generally referred to as “capital reserves”. It is helpful when asserting the defense for districts to make sure that it specifies in its budget ordinance what amount of the planned expenditures or funds are for capital reserves. In addition, the adoption of a capital projects plan by the board of trustees is very helpful. Minutes from the board of trustees meetings should note any capital reserve projects which the board is considering. No such language allowing for an accumulation of reserves exists in the authorization statutes for the ambulance or rescue funds.
The establishment of a capital reserve fund in a district’s budget and audit has been used as a defense to an excess accumulation tax rate objection. The budget and audit should show the transfer of funds from the levied fund account to the capital reserve fund. The capital reserve fund, however, cannot just exist as a stash of excess revenues and the district needs to show proof of capital project planning for which the money is being held in reserve. Risk care management policies support levies in the tort fund.
Every objection is different. Consequently, the existence of a risk care management policy or a capital reserve fund in a budget or audit does not automatically defeat an objection. As with any lawsuit, the court will review all of the documents making a determination on the validity of a levy.
Your first notice of a tax rate objection typically comes from your county state’s attorney. The state’s attorney is involved because it is the county that distributes the levy as adopted by the taxing bodies. The letter will usually requests copies of budgets, audits and any other financial documents necessary to defeat the objection. It is important to provide the information as soon as possible with a copy to your corporate counsel. In most counties, the state’s attorney requests corporate counsel involvement. A cost analysis will usually need to occur. We have seen objections for fire protection districts with a value as low as $40 and as high as $350,000.
With proper documentation and planning, a district can reduce the amount of tax rate objections it receives while protecting the tax revenue you receive to run your department.